Why Your Real Estate Goes Unfunded (The Truth) – Natu Myers of Raises.com
That assets and the market right now. What’s your take on the on the recent I mean there might be comfort in the market. (Real estate 70 rule)
Can you say it again? I actually didn’t hear it. And you can take the lead with you. I said, imagine corporate in the market. I’m looking at and as it deal with assuming a good bet. Right? Which is the cash flow is already close to market. I mean, the rent is really close to market, so there’s little room to increase the rental. But the interest rate on the available, that’s about 1.7. So there’s a huge trade off between getting the interest rate, which is in the market about 6.6 to 7% right now. And they can only deal with more to increase the cash flow. In terms of the rental, the entry into rental is about the market level already. So you see the value of that. So you’re barely, barely covering your cost, you’re covering the debt service so there’s no enough cash flow. What time does that make sense? (Real estate 70 rule)
I got your drift. So they did that service. It’s 1.5 right now. Ordinarily, for adults, that has just 1.67. I would expect to have this service ratio of about two or 2.5. Does that make sense? Yeah, they might get this right now.
And when you say the market are you talking about? Are you being hyper local or are you Canada?
The interest the interest rate is about 6 to 7% in the market. But there’s a deal that I can take on the debt. They have about 2.7 million in debt at 1.7% interest rate. Mhm. The challenge is that it’s not quite flowing well because the flowing, while the coverage ratio should be two plus not 1.5. Hmm. And that doesn’t make sense. And that is because of the interest rate. Yeah, that’s what I’m saying. Because of the lower interest rate, it should be higher than that. It should be that even though the time the time is five years and the amortization is three years, it should be higher than 1.5. So what I’m looking at is there’s not enough cash flow on the deal because the room to increase the rental is not really that because the rental is currently on the market level. So what I’m so your view on that before I tell you what I’m thinking. (Real estate 70 rule)
Amanda, what do you think? I have a few questions, but I’ll let you take the lead.
Yeah. I mean, so like that, that is definitely a concern with such a low interest rate and still not the, the ratio doesn’t really look good. And, and if you have to refinance the the project, refinance the debt, then you’re most likely going to get a higher interest rate. And and at the same time, there is no scope for the rent, no school for increasing rent either. So increase in revenue. So, yeah, I mean, like from like from what I can understand from just the brief introduction, I would say like there’s definitely something wrong. But, but maybe like with such a low interest rate and you’re saying saying the mark, I’m sorry, where is the location? Like, where is this property? Okay, so like, even if you consider that, like maybe there might be some things that you can look at, like from an operating expenses perspective that’s taking up a share of that cash flow that we should be getting on. Like on an bad level. Maybe they have some extra expenses that you can cut down. So I would say like if you like are really interested in this deal. And overall, like in the current situation, I would say like it doesn’t look like a good one, but, but I would suggest like look into the operating expenses, like what are the expenses? Maybe there are some expenses that you can cut down and increase the cash flow, because what many people do is like they have like higher expenses than what is needed to run the run the I mean. In the building. So that’s all I can think of. I mean, what do you think? (Real estate 70 rule)
I mean, that’s really what you said covers a lot of things I didn’t think about. I’m just I’m just wondering what the the occupancy rate is. And then it’s like, how much can you burn the occupancy? Like, how much can you do on the occupancy rates? That’s all.
Three units. So you say I have about occupancy of 94%. So that’s just about 3%, three units vacant.
It’s hard. Yeah, I think it’s hard. It’s hard. Yeah. Because if you were yeah, that’s the only thing I was thinking about. But I. I will just. I’ll just look for another. Unless it’s hard to find others.
Yeah. Yeah. Yeah. Because I was looking at that. But I wanted somebody else’s opinion because I know it’s not. It doesn’t make sense that that low interest rates and the only debt coverage is just 1.5. I would expect the recovery ratio about. You know, up to even three, three X because it’s quite low. And I’m talking about 75% LTV. Yeah. So it’s not as if it’s 90 or 95%. Right? (Real estate 70 rule)
Yeah. And those are my thoughts. But I just. One question is just. You got. So then the commercial lender is the term was for how long are you in?
Yes, they have three years to go. The term ends 2025 June. So approximately three years.
Yeah. And God knows what will happen in the world by 2025 at this rate.
But yeah. Yeah, go ahead. Yeah. So I don’t really like even though I’m skeptical on the economy for the next year or so, like I don’t expect the interest rate to stay that high for a long period of time. Like they would have to go down in maybe like if not in next year, then maybe a year after that. So, like, interest rate will go down for sure. Like after a certain point, you never know when. But at the same time, like I would actually. So you have been involved in this like real estate for quite a while. So you have a really good idea of the like the operating expenses of any of the or any of a similar kind of a project. So 45%. Sorry, the market is usually about 45% to 50%. So so to be on the safe side, you really do 50%. Yes. So maybe like, you know, for this company, they have like certain expenses that are not the standard ones and that you might be able to get off because like if you’re saying the the real estate is like fully, almost fully occupied with current market rates and it is in like an admin kind of area where the demand is kind of high. So I don’t really understand like why this so low. The only thing I can think is like, definitely they have some certain operating expenses that shouldn’t be there and maybe you can look into that. And if you can cut down those expenses, this might turn out to be a good deal. (Real estate 70 rule)
No. If they think what I’ve done is to actually just model it for just three years instead of five years. So it won’t be long. Well, yes, more or less, when the time of the loan is not clear. So if you are willing to take on a new debt, a new level, that higher interest rates is not factored into this. Hmm. Does that make sense? Yeah. No, definitely not to I that first step. Like, if I’m analyzing this, this business, right? The first thing I would do is like, look at the current numbers. And if there are, like, any room for improvement in that. And after that, like, if there is a room for improvement and it does improve, then factor in the higher interest rate and the new mortgage refinance like when you when you do that. So I think like the first step would be to just analyze the financials, the current financials the company has. Now the current financials, when they are the more or less normalized. This is the market. So it’s been normalized. So that’s the issue. So I guess I just yeah, it’s been normalized. It is a standard I put into this, this, this, this. You know, the things that you have no control over is utility. You have control over utility bills that are controlled by the tax. You don’t have control over the insurance. You have no you still have a bit of control. But generally you don’t have control. Right. So some of these things can be challenged. (Real estate 70 rule)
Then the property management fee, you have more control over that because that’s what you sign up with, right? It’s not for 3% or 4%, and that’s what they charge based on whatever revenue you generated or internally they generate on a month by month basis. No. Okay. I just want to have your thoughts on that. I think that’s what I just and I don’t want to boil the body with those. That’s right. I just want one follow up question. So the current owners, like the price that you’re getting. So have are you getting like, so what? What price are you considering? So are you just like buying it at the same price? The other person bought it like maybe a year or year ago to a year ago or something like that. It’s some of this is an old building, so most of it’s been well innovated on the outside. But the. Yeah, I think on this they’re looking for one 11,000 unique. That is pretty unique for it to make sense because once they the cap rates which is about 4.2 I think about 4.7 at the listed price, I think 4.5 or at least that price. The only way this is going to make sense is by this that less than under the unit, because a cap rate is not there. Right. It’s maxed out. The rent is not there. It’s maxed out as well. Without a lot of renovation. I do I can’t really charge more than what it is. Does that make sense? Regardless of whatever I put in there? Because that’s the market is. (Real estate 70 rule)
Yeah, we have a renovation premium be about 5%, 10% because it’s not like us. We can do something crazy. All right. So there’s no real upside there. The only way I could get outside is to reduce the price. And that’s the only way it’s going to make sense. No one wants to consider looking at it. If I get a significant price reduction, at least as of the less than 10,000. And Betsy to the least surprised. Yeah. No, I definitely so, because the reason I asked you that question was so like, maybe they are pricing it in terms of what the market was like six months to a year ago. And, and so and that’s what they’re coding you whereas the market and even like competitive rent right now is going down so like the if you look at the owner equivalents and even the average house price, it has gone down like recently. So maybe I think it’s just a valuation kind of thing because there’s not much room in a real estate deal to charge a premium, as you said, like, you know, you can’t really do a lot in that. So that’s where I don’t really understand why either the price is high or there’s definitely some normalized things happening in that business for sure. No. Yes. It’s that coverage ratio is 1.1.5 for. I think that it’s very hot. So in terms of. Yeah, that’s a difficult point. Okay. Thank you, guys. I just wanted to get on that. (Real estate 70 rule)
Yeah, no worries. Hey, that’s why we. That’s why we put all this stuff together and use it as much as you need. And. Matter. You got some things I can get. So I appreciate that. And and hopefully, hopefully it takes you in the right direction. So then what specific outcome are you going to run with now? (Real estate 70 rule)
All expense. We can reduce working price. Reduce? You can. I might consider it, but in this case, now we have to more or less try to get investors that are not looking for cars, but they are looking for capital appreciation. Yeah. So the the struggle. I’m trying to get capital to pay my investors whatever. I thought that we were invested in the in the properties. So what we target in exits is just three years. Right. So the target maybe 60% or 1.5% or 1.5 X, it’s a usual five five year old. And then again 50% are at least 1.7 to 1.2 X, So because this shorter period of time. Well. That’s what I’ll be looking at anyways. That’s what I’m thinking. Yeah. If I could get the price reduced significantly. (Real estate 70 rule)
Exactly. And it can also help to also talk to. We have what Octavio and those folks are working on some serious transactions. Their investors themselves. Octavius partner like Danny’s partner. He he had a million bucks to invest when he was 25, and he’s been invested in real estate for a while. So it may be productive to we’ll get we’ll get we’ll get somebody to get you connected. You know, just so maybe you can share an opinion. They’re looking for hotels. Yeah, they’re looking for hotel investors. In the future, you can just say, Hey, what in the future are you? I’ll help you. If tell investors, like, let’s just meet. Like, what do you think of this? And then he’s a direct investor anyway, so then you can get a good opinion. So I’ll get them. I’ll get you linked up with him also. What else? What’s the second thing? And also, I mean, this whole recession story, too. I mean, maybe you can play up that angle, too, because matter. Did we not say that, hey, real estate’s, you know, going down like this. And then three years after, maybe after the recession, you know, it goes up. I don’t know what investors are going to say, but maybe you can use that as part of narrative. A If it’s capital appreciation, the prices are low. Yeah, at the bottom and you go after the recession. (Real estate 70 rule)
So yeah, cool, cool. Yeah, I was just one of the reasons why this is a model for just three years is the ordinance says that there are many number of years on the debts the debt and just three years left and so 2023, 2024, 2025. So by June 25, that’s the end of the time of the debt. Yeah, that’s why I’m just curious. Let’s just all for three years and hopefully in three years, maybe if the market improved, maybe go back to a 3% interest rate at that point. Yeah, maybe water at that point to refinance, take some money out and continue to hold on to the property. (marketing)
Yeah. And again, that can always be the that can be the running story or the hypothesis. And then we’ll see if everyone believes that if they believe it, it would just feed into what the investors believe. Whatever they believe, we’re going to just sell them whatever they believe. So you can just get this thing closed, obviously, ethically, but just just so that they don’t give you any slowdown, you know, so exactly. All right, cool. Okay. Thank you so much, guys. Thank you. Yeah. (Real estate 70 rule)
Good call. Thank you. Matter. You know, I learned quite a few things here. Really insightful. So then we’ll get we’ll get the introduction in and let us know if you need any help. All right?
Yeah. So thank you.
Yeah, sure.
Thank you. Thank you.